FAMILY, FRIENDS, INVESTMENT CAN BE A COMBUSTIBLE MIX

Friends, family and fools. That is where most entrepreneurs turn for their first investment dollars. But that road comes with more than a few hairpin turns that sometimes lead to crash and burn.

When we started our first software company in 1995, Barbara’s brother Douglas and his friends were many of our initial investors. That early money was critical in allowing us to build a successful company. But Neil will tell you that Douglas “made him crazy” with the weekly question sessions lasting an hour. The fact that we had a successful exit “saved the marriage.”

When Grant Farwell, now 23, had an idea for an Internet business, he turned to his father — successful serial entrepreneur Anthony Farwell — for advice and capital.

In 2008, Grant came up with the concept for what has become Barc (browser assisted relay chat), an online tool that allows you to chat with anyone who is on the same website or using the same Wi-Fi as you are. The product, currently in beta mode, should be available by the end of March.

During college, Grant worked on the product, fine-tuning the interface and the technical requirements document. Last year, he left college before graduating to devote full-time to the venture.

“My dad understood that this was something that I was going to devote everything to. I took all of my savings (about $10,000), and my dad also agreed to invest,” said Grant. So far, his father has invested a six-figure amount.

It is important to note there that although the amounts invested were exponentially different, the commitment was 100 percent by Grant. He invested “everything he had.”

Anthony said, “I thought that Grant’s idea had tremendous merit. I would have told him frankly if I didn’t like the idea. His mom, Grant and I negotiated, and Grant was very strong in his feelings about his equity position.”

After your family agrees to invest, next comes a tougher part — setting the valuation and your share of the equity. This is critical, because you need to set terms and conditions that allow for the next round from a professional investor. You need to think two or three moves ahead. There are several models for taking money, one being convertible debt. That is a way to defer the awkward discussion for a later time and allow the next investor to set the valuation.

In Grant’s case, his father set a “reasonable” equity valuation, aware that they may want to raise money from venture capitalists later. We’ve seen situations where entrepreneurs set too high a value on their company when they take money from “Uncle Harry,” who then sees his ownership percentage get crushed when more sophisticated investors enter. That can make for an uncomfortable Thanksgiving dinner.

Grant acknowledges that there have been some awkward moments. There have been some “heated discussions about how things should work. But the best changes and improvements have come out of our most-difficult conversations,” he said.

The best thing Grant did was bring in an experienced partner, a “been there, done that” leader in Karen Brailean, who serves as chief operating officer. “I have been impressed with the way that they fight. They are careful about the words that they choose. They recognize the strengths that they each bring,” she said.